Measuring a company's health: go by the numbers

Companies that trade on the stock exchange are obliged to produce a full-year report to inform shareholders of their performance, writes Claire Shoesmith

In the same way that you want to know how much money you have in your wallet or your bank account, a company's shareholders want to know how much money their firm is making.

As a result, companies listed on the Irish Stock Exchange are required to release an update of their earnings performance twice a year to shareholders and interested parties.

These results are usually released at 7am via the stock exchange's newswire and, in the case of full-year results, must be published within four months of the end of the company's reporting year. For interim results, the time period is three months.

In the US, legislation requires that such an update is released on a quarterly basis, but in Ireland, the obligation is twice a year.

Companies not listed on the stock exchange are only obliged to file returns on an annual basis to the Companies Office. The detail required of the report depends on the size of the company.

This week, we take a look at one of Ireland's largest companies, CRH, which earlier this week released its figures for the 12 months to the end of December. These full-year results, as they are known, follow the group's first-half results and a trading update, which it gave in January, forecasting record pretax profits of more than €1.25 billion. A full outline of Tuesday's results can be found on CRH's website, www.crh.ie.

The results take the form of a written analysis of the group's performance, some comments by one of its executives, followed by a full-blown account of the numbers, known as the profit and loss account and balance sheet. For the purpose of analysing the results, we take our numbers from the profit and loss account and look to the written synopsis for the reason behind the rise or fall in profit and sales.

In the case of CRH, the building materials group this week reported a better-than-expected increase in profit in 2005 after a strong performance in the group's US operations offset weakness in some of its European divisions.

Profit before tax rose 16 per cent to €1.28 billion in the year to the end of December.

This compares with €1.10 billion in the prior year and is ahead of a median forecast of 12 analysts' predictions, which had predicted pretax profit of €1.26 billion.

Analysts usually predict in advance what they expect a company's results to be, and some news services collate these figures to enable investors to more easily assess the company's performance.

Revenue at the group increased 13 per cent, to €14.4 billion, while earnings per share, which is calculated by dividing a company's net revenue by the number of shares in issue, increased by 14 per cent to 186.7 cent - again ahead of analysts' forecasts. Companies are required to release many different numbers in the profit and loss account, but these are the main ones that analysts and investors focus on. Shareholders will also be keen to look at the dividend, which is the money that is paid out per share to each of the company's investors.

CRH this week raised its dividend by 18 per cent to 39 cent, meaning that for every share held, investors will receive 39 cent. Analysts have said that, because of the positive outlook given by the company in this week's results, they expect it to maintain "strong double-digit" dividend growth over the next few years, meaning it is probably a good bet for investors looking for an income from their shares.

While companies don't give detailed forecasts about what they expect to occur in the coming year, they usually give some sort of guidance as to what they expect. In this week's statement, CRH said it had entered 2006 with "good momentum" and is hopeful of a gradual improvement in its European operations.

The company also said it expects a "kick" from acquisitions in the current year after the bulk of its €1.45 billion of purchases came in the latter part of the year, meaning the benefits have yet to be felt.

"While as always, risks remain, the current business outlook is on the whole positive," said Liam O'Mahony, CRH's chief executive. "A gradual pick-up in European economies seems broadly under way, which if maintained, should bring good benefits."

After the results were released on Tuesday, the company's shares, which have risen by 20 per cent since November, fell 20 cent, to €27.35. However, this decline reflected the general mood in the market on Tuesday and was not necessarily an investor verdict on the stock.

In fact, two brokers, NCB and the company's own broker, Davy, both raised their forecasts for the group's expected performance this year on the back of the statement.

CRH's growth has in the past largely been led by acquisitions, but most of its development spending in 2005 was confined to the second half of the year. In the six months to the end of December, the group spent €1.2 billion on 31 acquisitions and three new capital projects.

The announcement of this spending, which came in the January trading update, was welcomed by analysts who had expressed concerns about the company's failure to complete the expected number of deals at the start of the year. O'Mahony said the company would continue to look out for further acquisitions.

"There is a significant pipeline of deals out there," he said. "We are talking to a lot of people and would be very disappointed if we didn't have continued success on the development front."

He said the group's focus would remain on its core markets of Europe and the US.

A breakdown of the results shows that operating profit at its European businesses improved by 7 per cent to €676 million, boosted by a strong performance from the materials divisions.

However, its European products division fared less well and performance at the distribution unit was flat. In the US, operating profits were up 22 per cent to €716 million.